May 29 (Bloomberg) -- The International Monetary Fund lowered its forecasts for China’s growth and said making “decisive” policy changes would put the economy on a more sustainable path.
Expansion will be about 7.75 percent this year and next, David Lipton, first deputy managing director of the IMF, said today at a press briefing in Beijing after concluding an annual review of China. In April, the IMF forecast growth of 8 percent this year and 8.2 percent expansion in 2014.
Lipton warned of risks from a record expansion of credit, with the revised outlook following an unexpected slowdown in the first quarter. Premier Li Keqiang, who took office in March, is planning policy changes that would open up more of the economy to private investment and alter a household-registration system that impedes urbanization.
“While China still has significant policy space and financial capacity to maintain stability even in the face of adverse shocks, the margins of safety are narrowing and a decisive impetus to reforms is needed to contain vulnerabilities and move the economy to a more sustainable growth path,” Lipton said.
At the same time, Lipton said China’s current monetary and fiscal policies are “appropriate” and the IMF isn’t suggesting China restrict credit now.
Lipton spoke after meeting with leaders including vice premiers Wang Qishan and Ma Kai, People’s Bank of China Governor Zhou Xiaochuan, Finance Minister Lou Jiwei and Liu He, a vice chairman of the National Development and Reform Commission, according to the IMF.
The fund’s lower forecast is in line with recent reductions by economists surveyed by Bloomberg News. The median estimate of 51 analysts this month was for 2013 growth of 7.8 percent, down from April’s projection of 8 percent.
Lipton repeated the IMF’s view from last year that the yuan is “moderately” undervalued against a basket of currencies and said a stronger yuan over time is needed to redress the issue. Further progress is needed on relaxing controls on interest rates and the exchange rate, he said.
China disputed the assessment last year and said the yuan was “now close to equilibrium or, at most, slightly undervalued,” according to the 2012 annual report.
The currency has gained about 3.5 percent against the dollar in the past year and today weakened 0.1 percent to 6.1267 per dollar.
China has assured the IMF that reining in credit expansion is a priority, said Lipton, the No. 2 official at the Washington-based fund. Rapid growth in financing raises questions over the quality of investment and the repayment ability of companies and local governments, Lipton said.
Curbing credit expansion may slow growth in the short term while putting the economy on a more sustainable path, Lipton said.
Lipton called for a bigger role for market forces in the economy, after Li said in March that cutting the government’s power was a “self-imposed revolution,” with changes that would “be very painful and even feel like cutting one’s wrist.”
China needs a “decisive push for rebalancing toward higher household incomes and consumption,” Lipton said. The nation should allow more competition in industries “currently considered strategic” and increase dividends from state-owned enterprises to “improve financial discipline and provide additional fiscal revenue,” Lipton said.
The IMF also urged deepening changes to tax policy and a “comprehensive re-ordering of local government finances.” China should strengthen governance in “lower-level state or state-related economic institutions, especially the banks, state-owned enterprises and local governments,” Lipton said.
The fund issued last year’s full annual report on China in July.
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